The Bank of England’s recipe for controlling inflation: a dash of increases, a bit of uncertainty

The Bank of England is due to hold its Monetary Policy Committee meeting on Thursday, with the market expecting a 0.5% increase in the base rate. This would raise the official bank rate to 4%, with the possibility of another rate hike in the future.

The Bank of England faces the difficult task of balancing the need to control inflation, which has been affecting prices of goods and services, with avoiding a downturn in the economy. Governor Andrew Bailey remains hopeful that the Bank’s current strategies will succeed in bringing down inflation, which has slowly fallen from its peak in October. However, policymakers remain cautious and may implement more measures to curb demand.

Services prices remain high, though the headline rate fell to 10.5% in December from its peak of 11.1% in October. Prices for food and non-alcoholic beverages also continued to rise, rising 16.8% in the past year. Industry leaders have warned that these prices could take a long time to come down.

Labor shortages and wage growth are also ongoing concerns. A tight labor market and strong wage growth in the private sector, which rose 7.2% in the three months through November, have led to industrial unrest. The disparity with public sector salaries, which rose by just 3.3% in the same period, added to these concerns. This may cause companies to pass on higher wage costs to consumers, contributing to the inflationary spiral.

Despite the expected rate hike, interest rates are expected to rise to around 4.5% before the Bank of England pauses rate hikes. This could put more pressure on borrowers, further weaken the housing market, and possibly reverse the uptick in consumer confidence. This could mean that the recession was only postponed, not avoided.

For homeowners with mortgages, the issue of setting their rates now is a tricky one. As the interest rate increases, the balance may head towards reform, but there is no clear answer.

In conclusion, the Bank of England faces the delicate task of controlling inflation while avoiding a downturn in the economy. An expected rate hike could put more pressure on borrowers and the housing market, but the future remains uncertain. Homeowners with mortgages will have to weigh their options and make their decisions carefully.

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